Federal Reserve System• Americans long resisted a central bank

Fear of centralized power Distrust of moneyed interests

• First U.S. experiments with a central bank terminated in 1811 and in 1836

• Without lender of last resort … Nationwide bank panics on a regular basis Panic of 1907 a central bank needed

• Federal Reserve Act of 1913 Elaborate system of checks and balances Decentralized District banks: Quasi-public institution owned by

private member commercial banks in the district

Functions of Federal Reserve District Banks• Clear checks

• Issue new currency/withdraw damaged currency from circulation

• Make discount loans to banks in district

• Evaluate mergers/expansions of bank activities

• Liaison between business community and the Fed

• Examine bank holding companies and state-chartered member banks

• Collect data on local business conditions

• Research Money, Banking and the Financial System

Board of Governors • Seven members headquartered in D.C.

• Appointed by president/confirmed by Senate

14-year non-renewable term

Chairman serves 4-year renewable term

Chairman speaks for Fed/“Runs the Show”

• Set reserve requirements

• Control the discount rate

• Direct open market operations

• Approve bank mergers

• Regulate bank holding companies/foreign banks in the US

Federal Open Market Committee(FOMC)• Meets eight times a year … more often if needed

Reports on domestic and currency open market operations

“Green book” forecast

“Blue book” forecasts … responses to alternative policies

• 12 Voting members: 7 Fed Governors; president of FRBNY; and presidents of 4 other district banks in rotation

• BoG Chairman chairs FOMC

• Directive to the trading desk at FRBNY announced at end of meeting

How Independent is the Fed?• Instrument independent

• Goal independent … undemocratic? Political pressure would impart inflationary bias to monetary policy

Political business cycle? Could facilitate Treasury financing of large budget deficits—

accommodation

• Independent revenue

• Structured by Congress/accountable to Congress

• Presidential influence Influence on Congress Appoints members Appoints chairman

European Central Bank

• Patterned after the Federal Reserve

• Central banks from each country play similar role as Fed district banks

Monetary operations are not centralized

ECB does not supervise and regulate financial institutions

More independent than Fed

• Maastricht Treaty would have to be revised to change ECB charge

But less goal independent than Fed

Price Stability Rules